Assessing Retail Store Size and the Impact of E-Commerce
It wasn’t that long ago that an array of U.S. retailers sought to be everything to customers, which led to a sizable scale-up in store size. In turn, the landscape welcomed an array of massive, brick-and-mortar retail arenas that sought to offer consumers anything and everything they might want during a shopping trip—all under one roof.
The days of all-or-nothing retail developments faded a few years back, but the retail landscape has remained on a steady growth tear—up until recently, that is. Between 2007 and 2018, more than 27,000 new retail stores opened in the U.S. But after a reliable streak of openings, expansion stalled between December 2017 and December of last year, as the total store count fell by 2,248. But well before that drop, we began to see that store size and store count were trending in different directions: Between 2007 and 2018, store counts increased while square footage declined.
Importantly, the growth of small-format stores (convenience, drug and dollar stores) has been a driving force in the long-term decline of store sizes—and closures. In fact, between 2017 and 2018, convenience and drug stores were the primary drivers of retail store closings. In total, more than 3,500 retail stores closed during that period.
Notably, small-format stores have been gaining ground on larger ones since 2009, which is when large-format size peaked at 10,516 square feet. Since then, square footage at U.S. retail stores has dropped 4.4%. The average size is now 10,051 square feet.
But not all large-format development has ceased. While warehouse clubs have only accounted for 1% of store openings since 2007, club sales are massive drivers of sales. Importantly, however, retail format does not guarantee success.
That said, the vast majority of stores that opened between 2007 and 2018 were small format: 46% were dollar stores, 25% were convenience stores and 16% were drug stores. Five percent were super centers, and only 1% were warehouse clubs.
From a consumer demand perspective, it’s clear that small formats and value players are winning in the marketplace. Convenience, drug and dollar stores have driven store count expansion since 2005, while growth across other formats has been less consistent. More than 2,300 new supermarkets have come online since 2005, for example, but this channel has seen its fair share of closures, tear-downs and rebuilds as well. It’s also worth noting that much of the growth in the supermarket channel has been driven by high- and low-end niche players like Trader Joe’s, Sprout’s, Whole Foods, ALDI, Lidl and Save-a-Lot.
Many factors are driving consumer shopping trends, which are consequently shaping physical shopping environments: fewer full stock-ups; more frequent trips for smaller baskets; abundance of choice; proximity to an array of options; increased spending on eating out; and e-commerce.
The E-Commerce Impact
There is no questioning the impact that e-commerce is having on how consumers shop and buy. According to Nielsen e-commerce measurement powered by Rakuten Intelligence, U.S. e-commerce sales of CPG items totaled $65.2 billion for the 52 weeks ended January 2019, up 29% from $50.5 billion in the previous year. We’ve also tracked a 32.7% compound annual growth rate over the past three years. E-commerce isn’t new in the past three years, however, and when we look at store closings during the last decade, we see that specialty retailers selling electronics, apparel, books, toys have been the most vulnerable to the growth of e-commerce.
It’s true that certain mass merchandise retailers have experienced difficulties over the past 10 years as well, but the closings associated with those difficulties have been more the result of format conversions and performance within certain companies than consumers switching to online options.
That’s not to say that consumers aren’t gradually adopting more digital and omnichannel preferences over time. They are, and many are starting to embrace omnichannel shopping avenues that leverage digital for many of the CPG items the buy from traditional outlets. Click-and-carry sales, for example, have grown from 4% of online consumer packaged goods (CPG) sales to 11% in just two years. This adoption, in fact, has hindered Amazon’s growth in recent months, and there’s no doubt that omnichannel and online purchasing will continue growing across categories.
In looking at store count trends over the past 10 years, we’re able to forecast which categories are most vulnerable to future e-commerce growth. That’s because store count changes across the U.S. have moved in sync with the adoption of e-commerce across categories. This gives retailers in vulnerable categories insight into how quickly they will need to develop meaningful value propositions aimed at driving increased foot traffic.
Time is of the essence. The same number of stores had closed in the first three months of 2019 that we saw close in all of 2018.